By bigbreakingwire 
India’s stock market has suffered its steepest fall in more than a year, with total market capitalisation dropping below $4 trillion for the first time since December 2023. A combination of a weakening rupee, foreign investor withdrawals, and high valuations has triggered a major selloff, wiping out over $1 trillion in equity value.
Major Indices and Market Impact
The benchmark Sensex and Nifty indices have declined by 3% so far in 2025, but the broader market has been hit even harder. The BSE MidCap index is down more than 13%, while the SmallCap index has fallen over 16%. This sharp decline in mid- and small-cap stocks has raised concerns about overall market stability.
Foreign institutional investors (FIIs) have pulled out more than $10 billion from Indian equities this year, raising questions about whether India’s multi-year bull run can continue. The outflow is a key factor behind the ongoing market downturn.
India Underperforms Global Markets
India has seen the sharpest market decline among global stock markets in 2025, with an 18% drop in total market capitalisation, according to Bloomberg.
In contrast, most major global markets have performed better. The US stock market, the world’s largest, has gained 3% this year. China and Japan have each risen by 2%, while stock markets in Hong Kong, Canada, the UK, and France have also registered gains of 1%, 7.2%, 7.1%, and 10%, respectively.
If Indian households invest less in stocks, the market could suffer, especially since it has been falling since late September due to weak earnings and foreign investor withdrawals. Jefferies warns that investment inflows may slow down as returns decrease, though the $5.6 billion inflow in January provided some relief.
India’s market weakness has been driven by concerns over economic growth, earnings uncertainty, and political instability. The Indian rupee has also weakened by nearly 1.5% against the US dollar, making it the second-worst-performing currency in Asia after the Indonesian rupiah. A weaker rupee makes Indian stocks less attractive to foreign investors, worsening the selloff.
Mid- and Small-Cap Stocks Hit Hardest
While India’s stock market has long been popular with investors seeking high-growth opportunities, stretched valuations are now weighing on sentiment.
At the conference, ICICI Prudential AMC’s Chief Investment Officer, S. Naren, warned against investing in mid- and small-cap funds through systematic investment plans (SIPs), citing high valuations and market volatility. His comments sparked a broader debate about whether India’s stock market is still a good bet for long-term investors.
Prominent valuation expert Aswath Damodaran has also raised concerns about India’s expensive stock market. Despite strong GDP growth, he believes Indian equities are among the most overvalued globally. The underperformance of the Sensex compared to China’s Shanghai Composite has further fueled discussions on whether India’s premium valuations are justified.
Weak Earnings and Investor Withdrawals
Earnings growth for India’s top companies has been weaker than expected. In the October-December quarter, of the 49 Nifty 50 companies that reported earnings, only 22 beat analyst expectations—the lowest number in seven quarters, according to Bloomberg.
The valuation of Indian stocks remains high. The Nifty 500 index is currently trading at 31 times its projected earnings, significantly higher than its 10-year average of 19x. During India’s 2002-07 bull run, this ratio was only 15x. Around 40 percent of Nifty 500 stocks are trading above 50 times earnings, compared to just 11 percent for the S&P 500 and 14 percent for China’s CSI 300.
As a result, investors are pulling money from India-focused exchange-traded funds (ETFs). The iShares MSCI India ETF (INDA), worth $8.6 billion, saw $212 million in outflows last week alone. In 2025, over $1 billion has been withdrawn, marking its worst start to a year since the pandemic.
Global Risks Add Pressure
India’s stock market decline is not just driven by domestic issues. Global economic uncertainty is also playing a role. The possibility of a tariff war under a second Trump administration has created additional nervousness, as India relies heavily on exports of goods and services to the US. Any shift in trade policy could impact corporate earnings and further weigh on market sentiment.
Another factor affecting stock market liquidity is the growing shift towards private deals, dark pools, and internal trading systems. More stock trades are happening outside public exchanges, making it harder for investors to buy or sell quickly. This reduces transparency and increases risks for retail investors.
What’s Next for Indian Markets?
With foreign investors withdrawing billions, earnings growth slowing, and valuations still stretched, India’s stock market faces an uncertain future. While strong economic growth remains a positive factor, market experts warn that valuations need to correct before long-term investors regain confidence.
For now, Indian markets remain under pressure, and investors will be closely watching corporate earnings, foreign investment trends, and global economic developments to gauge the next move.
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[…] Indian stock markets have become the second-least preferred in Asia, according to the latest Bank of America (BofA) fund manager survey. The report highlights a decline in investor confidence as foreign investors pull out and earnings growth remains sluggish. […]